Don’t be taken in by the firmer gold price this morning.
The headwinds are brewing once again for the precious metal with Bloomberg warning that the asset class is under threat of suffering its longest slump in 17 years.
The spot gold price found tentative support from the drop in the US dollar overnight, with the price of the yellow metal inching up 0.1% to around $US1,154 an ounce. Gold had dropped in the past three consecutive sessions.
There’s expectation for the US dollar to continue to climb higher in the coming months as the US Federal Reserve is tipped to lift interest rates as early as June this year.
The higher greenback, rising interest rates, a rebounding US economy and the benign inflation outlook are conspiring to send the gold price spiraling towards the psychologically important $US1,000 an ounce price point.
I suspect our ASX-listed gold miners will be under renewed pressure in the coming weeks, if not months. But I would look at any weakness as a buying opportunity as I am expecting gold to hold above the $US1,000 mark.
While it isn’t obvious to some, there are a number of tailwinds that are likely to keep gold from tanking.
First is the impeding debt ceiling debacle in the US. US politicians have been kicking this football down the field repeatedly and the deadline of April 15 to lift the country’s debt ceiling is looming. Uncertainty over this issue is supportive of gold.
The second reason is that the high US dollar is starting to put the brakes on the US economy. Multinationals, such as Procter & Gamble and Hewlett-Packard, are already warning of the impact of the dollar on their profit line.
One can only imagine how the high US currency is hurting US manufacturing – a sector that has helped power up the US economy since the depth of the global financial crisis.
What this all adds up to is the potential slowing of a US dollar appreciation, which would be good news for gold.
Further, physical demand for gold remains strong. Gold mints around the world, even in the US, are still reporting high or growing demand for gold coins. These investors are not put off by the volatile gold price.
This is why I am looking to add gold stocks to my portfolio (I currently have very little exposure to the sector) over the coming weeks.
The stocks I am keenly watching have a declining cost profile (production costs need to be comfortably below $US1,000 per ounce), decent mine life and majority Australian-based assets.
The trick is to buy a basket of gold stocks to help diversify operating risks. The stocks worth considering are Northern Star Resources Ltd (ASX: NST), Regis Resources Limited (ASX: RRL) and Doray Minerals Limited (ASX: DRM).